Case by Robert A.G.

Monks and Nell Minow:

Johnson & Johnson
How much is the confidence of the marketplace worth? How
should a company “invest” in gaining and maintaining that
confidence? How does a company respond when confidence has
been shaken?
Johnson & Johnson faced two crises with its Tylenol product,
the first in 1982 and the second just four years later. The
apisodes show how a company can respond to an almost instant
vaporation of consumer confidence by demonstrating to the
public that it is more interested in safety than profits.
In 1982, seven people died after taking tampered Tylenol. One
variety of the product was sold in capsule form, and the capsules
could easily be opened. It was clear that the poison had been
inserted in the capsules after they left Johnson & Johnson. Sales
of the product plummeted. Johnson & Johnson recalled all of
their Tylenol capsules and introduced new “tamper-resistant”
packaging, so that consumers could know if a bottle had been
opened prior to purchase. The company was able to regain
market share despite the initial drop in sales.
By 1986 Tylenol had regained a 35 percent share of the $1.5
billion nonprescription pain-reliever market, as big a share as
the product had achieved before the 1982 crisis. Tylenol was
Johnson & Johnson’s most profitable single brand, accounting
for some $525 million in revenues in 1985. The capsule form
accounted for roughly a third of that. When, in February 1986, it
became known that a New York woman died of taking cyanide-
laced Tylenol, those revived revenues were threatened. The
incident became more serious when a second bottle of
adulterated capsules was discovered in the same Westchester
village.
The questions facing Johnson & Johnson were these. Should the
company launch another all-out offensive to calm consumer
fears, or could the company get by with less drastic damage
limitation? Did a pair of contaminated bottles in a New York
suburb warrant a nationwide campaign to withdraw the
capsules? According to the New York Times, chairman James
E. Burke’s aim was to strike a balance “between what is good
for consumers and what is good for Johnson & Johnson.”
Johnson & Johnson did indeed withdraw all Tylenol capsules
from the nation’s shelves, and replaced them with new
“caplets.” These were coated tablets that were safer from
contamination. The full withdrawal – which could have cost the
company’s shareholders $150 million, or one-quarter of Johnson
& Johnson’s 1985 earnings – was deemed necessary in the light
of bans in 14 states on the sale of Tylenol, and a drop in sales
similar to that following the 1982 crisis.
In an interview with the New York Times, James Burke said
that the company’s decision-making was argumentative and
aggressive. Discussions were characterized by “yelling and
screaming” he said. Some executives pressed for the withdrawal
and discontinuation of the capsule product. Others argued that
an isolated incident in a small town did not merit a national
campaign.
The decision to withdraw the capsules was encouraged by a $4
fall in Johnson & Johnson’s stock price in the days following the
death of the Westchester woman. The company launched a
massive publicity campaign to defend the Tylenol product, led
by James Burke himself. The company held three news
conferences, and Burke made over a dozen television
appearances, including one on the “Donahue”
television program.
Did Johnson & Johnson act in the interests of the company’s
customers or shareholders? To what extent are those interests
mutually exclusive? To what extent are they inextricably linked?